Telecom Market You Probably Never Heard Of Costs Consumers & Businesses An Extra $20B Per Year

Image courtesy of jpghouse

There are pretty good odds your neighborhood is subject to a monopoly on broadband. It stinks and needs to change, but we’re used to it. We think about it. It’s right there every month, when we get our bills or have a crappy customer service call and still can’t switch providers even if we want to. But there’s a whole other monopoly telecom market that’s still probably costing you a couple hundred dollars a year, and it’s basically invisible to most of us.

That’s the special access market, and a new study and report (PDF) from the Consumer Federation of America says that a lack of competition and a lack of regulation in it are costing us all at least $20 billion a more per year than we need to be spending. The report’s pretty dense, so let’s break it down in an easy Q&A.

Okay, first: what the heck is special access?
“Special access” is a category of connection that is larger and more, er, specialized than just “business” or “residential.” Basically, it’s for bulk data. Examples of special access connections include:

  • the “middle mile” connecting cell phone towers to networks
  • the network access connecting all of a bank’s ATMs
  • the lines that connect point-of-sale systems and in-store systems for a chain retailer

Without these telecom lines, commerce, business, healthcare, and everything else as we know it in the modern era would basically, y’know, not work at all. So they’re important.

Got it. So what’s the problem with the special access market?
Special access is important, right? So not-having it isn’t an option. You’ve got to have it and it’s got to work, so you do what it takes to keep those lines open.

But according to the CFA’s report, the marketplace for special access is, well, really not good. In the same way that residential broadband competition basically doesn’t exist on a nationwide level, the market for special access is basically a series of local monopolies.

The result, the CFA paper argues, is that the necessity of having special access lines, along with the lack of competition and regulation in the marketplace, basically allows the telecom companies to price-gouge the crap out of everyone with impunity — costs that get passed along to consumers all over the place.

So why is the market so messed up?
This goes all the way back to our old friend, Ma Bell, and the problem of competition in American telecom.

AT&T was a national phone monopoly until the early 1980s, when it was forced to break up into regional Bell carriers. Through the 1980s and 1990s, as a result of a market that had never grown competitive, special access services were subject to rate regulation and price cap regulation, under the FCC’s guidelines. In short, there were limits on what they were allowed to charge, in order to prevent them from abusing their monopoly status to functionally extort cash out of captive customers.

That changed with the Telecommunications Act of 1996, which sought to maintain pricing equitability through competition instead of regulation. The deregulation of special access rates didn’t kick in until 1999, but even by that point there was still not really any competition to speak of.

However, the theory at the time was that competition would soon come and the market would sort things out. That… has not exactly happened. Even a little.

So it’s one big monopoly, or what?
More like a bunch of medium ones.

The bulk of the report is dedicated to charts, graphs, and equations detailing exactly how the researchers came to the conclusion that the marketplace for special access services is “highly concentrated.” In human English, there are only a handful of large incumbent companies — Verizon, AT&T, Frontier, and CenturyLink — providing the services, and depending where you are, one of those four companies controls somewhere between 80% and 90% of the local market.

And that’s a problem because…?
In short, the CFA paper argues that it means the networks cost too damn much. In their words:

About half of the total bill paid to the large incumbent local phone companies for special access service, who control between 5/6 and 9/10 of the special access market, is the result of the abuse of market power — i.e. setting prices far above costs to earn excess profits.

The large incumbent local phone companies have been able to abuse their market power because the FCC deregulated this market long before there was effective competition. … Because of the importance of special access as an immediate good, the $20 billion in annual overcharges suppresses a significant amount of economic activity, reducing economic output by at least another $20 billion.

The CFA claims that the total, cumulative value of all those economic losses just since 2010 works out to more than $150 billion — a pretty hefty chunk of change.

Does this matter to me?
Yup. If your mobile carrier, bank, local grocery store chain, or any other business you transact with has to pay higher rates for their own back-end network connection, where do you think they make up the extra cash without cutting into their own profit margins?

Yeah: they pass it through to consumers. In other words, you are paying a significant chunk of the estimated $40 billion paid to special access providers annually. The CFA paper says that works out to over $300 per year per household — half of which is “an excess cost.”

Okay so, why release this now? What’s being done about it? Is anything happening?
There are two separate things going on with regards to special access at the FCC right now.

First is the matter of, well, figuring out what’s going on with regards to special access. The FCC has a proceeding underway just to gather data about the special access marketplace, because the previous data collection practice was halted in 2007. That means any information the agency does have is most of a decade out of date, and so the commission needs a plan to gather new data and have it on hand before they can consider any new rules or regulations.

That process began some time ago (the docket was opened in January, 2005) and continues still today. Because the data being collected are all confidential or highly confidential, and subject to all kinds of agreements and proceedings, getting anything done with it has a lengthy process behind it and takes a long time.

Separately, about six months ago, the FCC responded to a petition from other carriers to take a look into the special access market. This investigation, instead of looking into the general question of, “should we make new rules and if so, what,” like the other process, is instead specifically questioning what the incumbents’s current behavior is and if it’s hurting other providers.

That process, too, is highly confidential. Everyone involved was required to have their documents in by the end of February, and while the public can view that comments and documents have been submitted, clicking most of them just turns up a notice that the material is confidential.

So what’s happening? A whole lot of “something,” but until there are public announcements, it’s hard to tell what.

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